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After jumping 7% on FY results, should investors buy Ocado Group plc?

Shares in online grocery retailer Ocado (LSE: OCDO) jumped by as much as 7% in early trade this morning, after the company reported an upbeat set of results for its fiscal 2016. 

The retailer, which has been struggling to grow profit since its IPO, reported an increase in profit before tax for 2016 on double-digit revenue growth. 

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For the year, the group’s statutory profit before tax and exceptional items rose 21.8% to £14.5m, from £11.9m last year, while reported profit before tax for the year rose 1.3% to £12.1m, up from £11.9m in the prior year. Earnings per share for the year came in at 1.96p, compared to 1.91p last year. On the top line,  gross sales including VAT and marketing vouchers increased 15% to £1.3bn.

The good news is that Ocado beat the City’s estimates for its growth last year. Analysts were expecting a pre-tax profit of £11.3m and earnings per share of 1.7p, down 14% year-on-year. The bad news is that while the group’s earnings are heading in the right direction, cash generation remains elusive. Net debt widened to £165m from £127m at the end of 2015.

Plenty of work to do

Unfortunately, while Ocado’s results today showed that the company’s sales and profit figures are moving in the right direction, concerns about the group’s overall direction and how it will continue to grow in the UK’s increasingly hostile retail environment remain. 

Ocado’s management has been touting the sale of the group’s technology to an overseas bidder for much of the past two years, in an attempt to show the City that the company has something other companies want and are prepared to pay for. However, a deal has not yet emerged, despite assurances from management that it is in discussions with several interested parties. Today, the company announced once again that there’s no overseas deal signed yet and that talks are continuing. 

Still, Ocado is growing in its home market, but it remains to be seen for how much longer this will continue. The company pegged a rise in active customer numbers of 14% during 2016 while the average customer order grew by 18%.

Crazy valuation 

Ocado’s shares may be rising today, but unless the company can push its growth rate higher, the market might lose patience with the firm. The shares are currently trading at a P/E of 135 based on fiscal 2016 figures, a sky-high multiple for a company that’s struggling to grow earnings. 

Compared to its brick and mortar peer Morrison’s (LSE: MRW), Ocado looks like a very bad investment indeed. As Ocado’s earnings stagnate, Morrison’s earnings per share are forecast to expand by 38% for the year ending 31 Jan 2017 and a further 11% for the year after. Shares in the retailer are currently trading at a forward P/E of 22.1, which is expensive but looks cheap compared to the projected growth rate. Unlike Ocado, shares in Morrison’s also support a dividend yield of 2.2%. 

The bottom line 

All in all, even though shares in Ocado are rising today, the firm still has a long way to go before the shares look attractive at their current valuation. Morrison’s could be a better buy. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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